People that find themselves in an emergency money situation have several choices to choose from for solving the problem. Credit cards, an emergency fund or a loan from a relative is sometimes an answer to short term financial issues. However, a lot of individuals are forced to use Payday loans. These easy loans come with little or no credit requirements. They can be a simple way to get money fast for someone in a bad financial situation. Even though Payday loans might give people quick access to cash, they are an evil business in the world of loans.
What is a Payday loan?
Payday loans lend people money that need a short-term quick fix to a financial situation. They are typically in smaller dollar amounts of something around $500. People that run into a financial jam needing to make a car payment, utility or rent payment sometimes use a Payday loan because they are not able to make ends meet by another method.
Payday lenders bring in over 54 billion dollars each year, according to Paydaylendingfacts.org. The person that uses a Payday loan is many times one that has poor credit, no credit card, and no savings set aside for emergencies. They may also be living paycheck to paycheck and have no checking or savings account.
The Payday loan industry claims the service they offer is only used for the occasional emergency that might come up. However, the truth is many people rely on them for food, rent, or car payments.
What is the evil side of Payday loans?
Although Payday lenders claim only occasional use by their customers, this is far from the truth. It is estimated that 7 out of 10 Payday loan customers use them regularly. The problem with the recurring use of Payday loans is it keeps a person in a circle of often having to rely on them. The reason for this is due to how a Payday loan is structured.
The convenience and easy qualification for Payday loans make them easily available, but the interest rates on these loans are generally much higher compared to borrowing money from somewhere else. These even include other borrowers, such as credit card companies that already charge high-interest rates. A $200 Payday loan can end up costing $600 or more due to the ridiculous interest rates they charge.
Many state laws have maximum fees Payday loan lenders can charge, but these maximums still come at a big cost. The maximum fees can range from $10 to $30 for every $100 borrowed. The Consumer Financial Protection Bureau found that many of the Payday loans equate to an annual interest rate of over 400%. Compare that to the average credit card interest rate of 16.46% and you can quickly see people are being taken advantage of for a profit.
The lending terms by Payday lenders are considered so predatory the Consumer Financial Protection Bureau put several laws in place to regulate the industry.
Why are evil Payday loans so bad?
The problem with Payday loans is these businesses prey on people in desperate financial situations. Often these are low-income families that have limited credit options when faced with a short-term financial obligation they must pay. The laws in each state may either permit, regulate or prohibit Payday loans, but either way, there are too many of them around for it not to be an issue.
Having people with poor or non-existent credit pay more for borrowing money is not something new. It happens all the time with things like home loans, auto loans, and even credit cards. The lower a person’s creditworthiness the higher the interest rate they will most often pay when borrowing money. There is some validation for this. A borrower that is a bigger risk for defaulting on a loan should be charged more interest. However, the issue with Payday lenders is it really is over the top of the profits they are making. This is just a case of a business model taking advantage of the people that likely need the most help in many circumstances.
What happens if a Payday loan is not repaid?
Payday lenders prey on people that can’t repay their loan. If a customer is not able to pay back the money they borrowed, they will often ask the lender to roll the loan over. This is where the lender really starts to cash in on the borrower. A Payday customer that rolls their loan over now has to pay the original loan amount with finance charges and the new additional finance charge on rolling the loan. This is where a $200 loan could end up costing $600 or more.
Defaulting on a Payday loan also opens the door to debt collectors. This will result in the phone ringing constantly along with notices in the mail to pay back the loan. Although there are laws in place for debt collectors, many of them skate on the line of being legal. Here is a previous article I wrote on How To Deal With Debt Collectors. These people are relentless, but there are ways to deal with them.
Defaulting on a Payday loan will always end up damaging a credit score long-term. This is a big reason to stay away from them. Some Payday lenders might not report to the major credit agencies. However, once a loan is in default and goes to collections, the collector will almost always report the default to the big credit reporting companies.
What alternatives are there to taking out a Payday loan when you need quick cash?
Although Payday lenders can look attractive in a pinch for quick money, some alternatives should be used. In addition, it is important to get into a position to not require the assistance of a Payday lender.
First, using a credit card for quick cash is never really a good choice. But if one is available the interest rate is more than likely much lower compared to a Payday loan. Here at Smart Start Money, we advocate not using credit cards if there is no money to immediately pay them off. However, choosing between the two evils of a credit card and Payday loan, the credit card wins.
Personal loans are also a much better option in most cases compared to Payday loans. Don’t just assume no one will loan money to you if you are considering a Payday lender. It is important to try other alternatives and a personal loan through a bank might be a better option. They will not lend to people in all situations, but it is worth the try.
Pawnshop loans are never a good idea, but they can be much better compared to a Payday loan. The interest a pawn shop might charge could be 200% compared to the 400% Payday loan. I do not advocate taking loans with a pawn shop, but it is better as a last resort compared to a Payday lender. The reason for this is there is no requirement to repay. A person puts up something for collateral and is loaned on 25-60% of the value. If a loan is not repaid, the pawnshop keeps the item. If a person is trying to repair their credit and there is a chance the loan might not be able to be repaid, pawning something can be a better choice.
The best alternative to not using a Payday lender is to not put yourself in that situation. If you do not have a checking or savings account, make it a goal to open one up at a bank. Also, set a goal to try and save money each month. This can be challenging for people that are really struggling, but it is the only way to stay out of trouble with predatory lenders.
Avoid taking a loan with a Payday lender at all costs. Although they market themselves as being helpful to people that need a small short-term loan, Payday lenders are evil. They prey on people in desperate economic situations.
If you are considering a loan from a Payday lender, look for an alternative that can be used to solve a short-term financial problem. Even though some of the other choices may not also be ideal, they are almost always better than a Payday loan.
Although it can be hard for some people to even make financial ends meet, the key to staying clear of a Payday lender is to not put yourself in that situation. Try to save money for the small emergencies that will come up. This is the best way to avoid putting yourself in a Payday lender situation.